5 minute read

The US Federal Reserve (Fed) is poised to kick off its interest rate cutting cycle next week, with traders now viewing a cut on 18 September as a near certainty. The only question left is by how much: 0.25 or 0.5 percentage points (pp)?

Either way, it's a huge deal: falling interest rates will affect the economy, and your portfolio, in a number of ways. Here's what you need to know.

When will interest rate cuts come?

Last week’s job market report was the last major insight before the Fed’s decision. The US created 142,000 new jobs, higher than July’s 89,000, but lower than the predicted 161,000. Unemployment figures softened the blow, easing from July’s 4.3% to 4.2%.

It’s a mixed bag of results, but it seems the market is now pretty much set on a 0.25 pp rate cut on 18 September. Based on prices in the futures market, traders expect two 0.25 pp cuts and one 0.5 pp cut by year-end (the current target US interest rate is 5.25–5.5%).

What does this mean for my portfolio?

Stocks: Rate cuts are generally a boon for stocks – lower borrowing costs spur business and consumer spending, while less attractive yields prompt investors to shift away from cash equivalents to riskier assets. But their impact can vary depending on the economic context; in a “soft landing” scenario, where inflation is brought down without triggering a recession, rate cuts have had a stronger effect.

Bonds: As we covered in our recent CIO Insights, interest rates have experienced a “reset”, now at their highest levels in nearly 25 years – great for income seekers. And when interest rates fall, existing bond prices rise, because they still pay out at the previous, higher rates. This is why "locking in" high yields now can be advantageous – you're securing a favourable rate and positioning yourself to benefit from capital appreciation. For an easy way to invest in global bonds, check out our new Income Investing portfolio.

What’s the takeaway here?

While it’s important to understand how markets can shift in the nearer-term, the key is sticking to a strategy that lasts. Our analysis of 21 cycles of Fed easing shows that returns across all major asset classes bounce back given time, with bonds leading and equities following.

Having a diversified portfolio that’s tailored to your risk appetite acts as a net, capturing opportunities across various asset classes (it’s what our General Investing portfolios are designed for). By staying invested with it, you position yourself to make the most of every market cycle – rate cuts included.

🎓 Simply Finance: Futures market

When analysts say "the market is expecting" a certain event, they're not just talking about general sentiment. Often, they're referring to data – for example, prices in the futures market.

Futures are contracts to buy or sell something at a specific price on a future date. Traders buy and sell those contracts based on their expectations. As more bets are placed on a particular outcome (like an interest rate cut), prices shift, reflecting what the market collectively expects.

💼 Data in Brief: 9–13 September

• Monday: China inflation
• Wednesday: UK GDP, US inflation
• Friday: US consumer sentiment

The latest US inflation data showed a slight uptick in core CPI, as disinflation in goods prices was offset by a pickup in stickier services costs. This suggests the Fed may opt to kick off its rate cut cycle next week with a more cautious 0.25 pp cut.

But even more important than how much the Fed cuts is that it starts to cut, alleviating pressure from a prolonged period of high borrowing costs. For investors, history shows that the onset of rate cut cycles tends to have a positive impact across various asset classes over the long term, as illustrated in our chart above.

- The StashAway Investment Team

📹 Webinar Recap

Curious about how to navigate today’s market with fixed income strategies? Our recent webinar, "Fixed Income: Smooth Sailing or Choppy Waters Ahead?", featured insights from YueJue Jin of J.P. Morgan Asset Management on the global economic outlook, including cooling inflation, potential interest rate cuts, and the opportunities that fixed income investments can offer in today’s market.

Catch up on everything you missed by watching the recording below.

If you’re ready to start building your passive income strategy today, learn more about our Income Investing portfolio here Income Investing powered by J.P. Morgan Asset Management

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J.P. Morgan Asset Management is not affiliated with StashAway. It is not responsible for investment decisions for StashAway Income Investing portfolios and makes no representations as to the advisability of investing in the same. Refer to stashaway.sg/income-investing for full disclosure.